Are you thinking of selling your house? This is a common step for many homeowners at some point, usually when they’re upsizing or downsizing. But although typical, there’s a lot to think about.
One important detail you might overlook is the due-on-sale clause in your mortgage agreement.
This clause, sometimes buried in the fine print, can have a big impact on your property sale. So it’s crucial to understand what it means to ensure everything goes smoothly.
Verify your home loan eligibility. Start hereIn this article (Skip to...)
- What is a due-on-sale clause?
- When does a due-on-sale clause get triggered?
- Are there any exceptions to the due-on-sale clause?
- How to find out if a mortgage includes a due-on-sale clause
- Implications of triggering a due-on-sale clause
- Due-on-sale clause FAQ
What is a due-on-sale clause?
In simple terms, a due-on-sale clause means that if you sell your property, your mortgage lender can ask for immediate repayment of the full remaining loan amount.
Verify your home loan eligibility. Start hereWhen a lender gives you a mortgage, they’re taking a risk by lending you a large sum of money. They rely on borrowers to make regular payments over time, and the property acts as collateral for the loan.
The due-on-sale clause protects their investment and serves as the lender’s security. So if you sell the property before paying off the remaining balance of the loan, the clause gives them more control. This allows them to recoup their remaining funds, especially since the new owner might not qualify for the same loan.
Additionally, mortgage rates can change over time. Therefore, this clause also allows lenders to adjust their loans based on current interest rates. This way, they can offer the new owner a loan with a rate that matches the current market.
When does a due-on-sale clause get triggered?
The clause usually applies when ownership of a property (secured by a mortgage) changes hands.
For example, selling your house to someone in a traditional home sale often triggers the due-on-sale clause.
Verify your home loan eligibility. Start hereIt’s worth noting that even giving a property as a gift to a family member or friend might activate it as well, depending on the specific terms in your existing mortgage agreement.
Also, if you’re thinking of transferring property ownership to a trust, be aware that this action can trigger it too, depending on the type of trust and how it’s structured.
Some trusts, like revocable living trusts, might not trigger the clause, but others can.
Are there any exceptions to the due-on-sale clause?
There are, however, exceptions to the due-on-sale clause. These include:
Verify your home loan eligibility. Start hereDivorce or legal separation
If there is a transfer of ownership of the property to an ex-spouse as part of a divorce settlement, the due-on-sale clause isn’t activated. In this case, ownership isn’t being sold—it’s being divided as part of the agreement.
Inheritance
Inheriting a property doesn’t generally trigger it either, although the loan will remain under the deceased borrower’s name. The inheriting party then agrees to make the remaining mortgage payments.
However, some mortgage lenders will likely require the inheriting party to go through a mortgage qualification process to ensure their ability to handle the new loan payments.
Living trust
If you create a revocable living trust and transfer your property to it while you’re alive, the due-on-sale clause typically won’t come into play. This is because you maintain control over the property and can cancel the trust at anytime.
However, transferring your property to an irrevocable living trust might trigger the clause. Unlike revocable trusts, irrevocable trusts mean you no longer have control over the asset once it’s transferred. Since the property is no longer in your name, your mortgage lender might require full repayment of the loan.
Joint tenancy
Joint tenancy is a type of ownership where two or more people hold equal ownership rights to a property. If one joint tenant passes away, their ownership interest automatically transfers to the remaining joint tenant. Since there’s no sale involved, the due-on-sale clause wouldn’t apply.
How can a homeowner find out if their mortgage agreement includes a due-on-sale clause?
Knowing whether your mortgage has a due-on-sale clause is important, especially if you’re selling your home.
Verify your home loan eligibility. Start hereIf you can’t locate this information in your original mortgage paperwork, reaching out to your lender is the next step. Their customer service representatives can access your loan details and confirm whether the clause exists in your agreement.
Typically, due-on-sale clauses are found in conventional mortgages, while government-backed loans like FHA or VA loans don’t usually have them. Therefore, having a government-backed loan means that it might be assumable, in which case a buyer could possibly take over your loan. However, they would need to pass the lender’s approval process.
What are the implications of triggering a due-on-sale clause for sellers?
Your lender can ask for full repayment if you trigger the clause, but they might not do so. Sometimes, they’ll let the sale proceed, with the new buyer getting a new mortgage. But it depends on your lender’s rules and your loan details.
Sometimes, though, your lender might insist on full repayment. If your lender insists on repayment, you might have some room to negotiate. Depending on your situation and payment history, you might persuade them to waive the clause or find another solution.
Verify your home loan eligibility. Start hereThe bottom line
Understanding the due-on-sale clause holds significant weight in the selling process. By familiarizing yourself with its implications, you can make decisions that ensure a smooth process from start to finish.
If you have questions about the clause, don’t hesitate to reach out to your lender. They can provide information on whether your mortgage includes this, break down the details, and help you understand how it affects your specific situation.
Due-on-sale clause FAQ
Time to make a move? Let us find the right mortgage for youA due-on-sale clause, also known as an alienation clause, is a provision commonly found in mortgage contracts that allows the lender to demand full repayment of the loan if the property ownership changes or if the property is sold.
Yes, there are a few exceptions to due-on-sale clauses. The most common exception is the transfer of property ownership through inheritance, where the due-on-sale clause usually does not apply.
If the due-on-sale clause is triggered, the lender has the right to demand immediate repayment of the outstanding mortgage balance. The borrower may need to find alternative financing or risk foreclosure.
Waiving or modifying a due-on-sale clause is at the discretion of the lender. However, some lenders may allow certain modifications, such as transferring the mortgage to a qualified assumable borrower.
Refinancing a mortgage does not typically trigger a due-on-sale clause. The clause is primarily concerned with changes in property ownership, not changes in mortgage terms or lenders.
Yes, a due-on-sale clause can potentially affect the sale of a property. Buyers need to ensure that they understand the implications of the clause and make appropriate arrangements for mortgage repayment or assumption.
Due-on-sale clauses are common in most mortgages, but not all mortgages may include them. It is important to review the terms of the mortgage agreement to determine if a due-on-sale clause is present.
Negotiating or removing a due-on-sale clause is typically challenging, as it is a standard provision in most mortgage contracts. However, discussing your specific circumstances with the lender may provide some insight into possible options.
